• Category:
  • Document type:
  • Level:
  • Page:
  • Words:

Free-Trade Agreements and Power of Government in Making Policy

Public policies affect businesses to a great extent. It is therefore important and in the best interest of businesses to remain informed and play a role in influencing various government decisions and public policy making. One perspective on business-government relationship is for the government to favour businesses and provide them with incentives for investment and business performance. The rationale is that businesses create a lot of jobs and source of society’s innovation and economic well-being (Gittell, Magnussen, & Merenda, 2010). Free trade Agreements (FTA) has brought another perspective where businesses can sue the government when a law or policy harms their investments. Indeed, increasingly FTAs contain clauses that allow foreign investors to sue government in case a policy or law harm their investment. This essay discuss ramification of such clauses regarding the power of national governments in making policy.

Free trade agreement (FTA) is a formal agreement signed between two or more countries with the intention of reducing or eliminating non-tariff trade barriers and customs. They are international treaties aimed at reducing barriers to trade. Indeed, FTAs are designed to improve the competitive position of a country’s exports (Cooper, 2014). Moreover, it gives a country a better access to major markets in the world and at the same time reduces the cost of imports for businesses and consumers. FTAs are increasingly being negotiated and signed between different countries all over the world. In some of these agreements, there are clauses which allow foreign investors to sue governments when a certain law or policy ‘harms’ their investment. These clauses have damaging effects on the power of national government in making policy as it curtails its freedom and power.

In a capitalist market, risk is an important factor considered before any investment is undertaken. It is an intrinsic characteristic of all businesses (Baier & Bergstrand, 2007). FTAs that give foreign investors the right to sue government is a departure from the foundation of a free market as it becomes an oligarchy. These trade agreements increase powers of businesses that somehow exceed the sovereignty of nations. Some FTAs allow foreign investors to sue governments for passing laws they believe will restrict their businesses. These laws negatively affect operations of the government as it has the potential of restricting governments from upholding their responsibility of enacting and enforcing regulations that ensures their citizen’s well-being. It limits the government from enacting and enforcing measures that protect the health and safety of its citizens as well as the environment and right of workers (Moore, 2014). In fact, the impact of the government efforts to foster development is significantly diluted by enacting provisions giving foreign investors right to sue the government in FTAs.

One of the effects of a FTA is to create a business environment that is more profitable to international investors and enhance capital mobility (Moore, 2014). As a result, the benefits of free trade may be undermined. Moreover, clauses that require the government to compensate investors for infringing their ‘rights’ drain away resources that could have been used in improving people’s standards of living. FTAs hamper the government efforts to protect the environment (Cazes & Verick, 2013). In some cases, a FTA agreement could have a provision that allow companies to sue the government for denying them a permit to build a toxic waste facility. Furthermore, others curtail the government from implementing international environmental agreements or attempts to enact regulation of toxic additives to gasoline. These clauses therefore potentially prevent legislatures that were democratically elected by people from passing laws that ensures a healthy and safe environment. It renders the government ineffective in protecting its citizens from negative impacts of foreign investors.

A government should have the power and mechanism to protect majority of its producers by enacting and implementing laws and policies supporting their welfare. FTAs threaten democracy and national sovereignty (Wilson, Calhoun, & Whitmore, 2014). This is because these agreements constrain government to act according to commercial considerations at the expense of its own citizen’s interests who elected them to champion and defend their interest. Trade agreements that give companies right to sue governments take economic and political power from the government and concentrate it in the hands of corporate elites. As a result, government is disempowered and its interests are trumped by those of corporations (Klein, 2008). Additionally, with the increase in structural adjustment policies brought by globalism, these agreements have the impact of reducing the right and capacity of governments to make policies that protect its citizens.

Governments should have the unlimited power to make laws and policies that put the interests and well-being of its citizens in the forefront. There should be no agreement that constrains its ability and power to enact and implement these policies. Increasingly, there are FTAs that allow foreign investors to sue the government when a law or policy harms their investment. It force the governments to act in accordance with commercial considerations hence power is concentrated at the hands of corporate elites. As a result, democracy and national sovereignty is threatened as power of government in making policies is significantly reduced. There should therefore be a balanced approach that does not limit the power of government in making policies and at the same time not discourage foreign investment through policy coherence.


Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members’ international trade?. Journal of international Economics, 71(1), 72-95.

Cazes, S., & Verick, S. (2013). The Labour Markets of Emerging Economies: Has growth translated into more and better jobs?. Palgrave Macmillan, Basingstoke, GB.

Cooper, W. H. (2014). FREE TRADE AGREEMENTS: IMPACT ON US TRADE AND IMPLICATIONS FOR US TRADE POLICY*. Current Politics and Economics of the United States, Canada and Mexico, 16(3), 425.

Gittell, R., Magnusson, M., & Merenda, M . (2010). The sustainable business casebook. Washington, D.C.:

Klein, N. (2008). The shock doctrine: the rise of disaster capitalism. New York: Metropolitan Books.

Moore, D.K., (2014). ‘Exploring the narratives on economic globalization: making room for democracy’, In In Anthony, JL & Karol, E.S (eds.), Global democracy and its difficulties. London: Routledge, 68-81.

Wilson, M., Calhoun, C., & Whitmore, E. (2014). ‘Contesting the neoliberal global agenda: lessons from activists’, In Noble, C., Strauss, H., & Littlechild, B. (eds.). Global social work: Crossing borders, blurring boundaries. The University of Sydney, N.SW: Sydney University Press, 311-326.